Is Uni-President China Holdings (HKG:220) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Uni-President China Holdings Ltd (HKG:220) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Uni-President China Holdings

What Is Uni-President China Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Uni-President China Holdings had CN¥990.6m of debt, an increase on CN¥767.8m, over one year. However, its balance sheet shows it holds CN¥4.11b in cash, so it actually has CN¥3.12b net cash.

How Strong Is Uni-President China Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Uni-President China Holdings had liabilities of CN¥8.02b due within 12 months and liabilities of CN¥736.7m due beyond that. Offsetting these obligations, it had cash of CN¥4.11b as well as receivables valued at CN¥649.9m due within 12 months. So its liabilities total CN¥3.99b more than the combination of its cash and short-term receivables.

Given Uni-President China Holdings has a market capitalization of CN¥22.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Uni-President China Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Uni-President China Holdings grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Uni-President China Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Uni-President China Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Uni-President China Holdings produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Uni-President China Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥3.12b. And it impressed us with its EBIT growth of 39% over the last year. So is Uni-President China Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Uni-President China Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.